Where Have the Consumer Digital Health Investors Gone?

Where have all the consumer digital health tech investors gone, long time passing?Where have all the consumer digital health tech investors gone, long time ago?Where have all the consumer digital health tech investors gone?Consumers have ignored them everyone.Oh, when will they ever learn? -Peter, Paul and Mary, as edited by me

Silicon Valley Bank’s Steve Allan, Head of Analytics, presented at a HealthXL board meeting I recently attended. Silicon Valley Bank (SVB) does a great job of researching and publishing on healthcare investing trends so check out their site for this.

Today’s topic was the state of consumer-focused digital health; in other words, stuff where the end-user or person whose wallet comes out is the consumer/patient/human. It’s a little murky, as SVB includes a number of things in the consumer category that I personally would categorize in a more professional clinical domain (e.g., digital therapeutics and disease/medication management). But frankly the whole digital health thing is getting pretty murky; it’s hard to tell where medtech, pharma, health services and health IT start and end with respect to each other anymore. Convergence is everywhere and the short-hand is “digital health.” Unfortunately, it’s become an outdated term in it’s short life. RIP Digital Health, long live tech-enabled healthcare in its many forms.

In any event, the SVB report about this topic, entitled Consumer Digital Health: Market Shift is Leading to New Opportunities can be found HERE and draws from a number of industry sources, including their own huge venture capital and startup clientele.

In a nutshell, the report concludes the following:

Venture investment in the consumer digital health category is down in 2016 from its peak in 2015 (around $2 Billion, down from about $2.7 Billion).

The percent of consumer digital health deals with a strategic investor involved is way up – all the way to 40% of deals.

The shift is moving towards clinically-focused deals and especially things that engage the patient in their care

Fitness/Wellness are way down in terms of investment dollars and deals

Disease management (and it’s buzzwordy friend Population Health), medication management and remote monitoring are the new black, especially where behavior change plays a role

We are heading into a time when more companies will focus on complex health issues and build FDA-regulated products

I thought I’d take a crack at the “why is this happening?” part of the equation, as I think it is important for entrepreneurs to really understand how healthcare technology is actually being adopted and especially who is paying for it.

I was particularly reminded of this after my HealthXL board meeting when I got an Uber in Cambridge, MA, one of the two biggest homes of digital health (Silicon Valley and Beantown environs are the leaders here). My Uber driver was, naturally, a digital health entrepreneur who immediately figured out my profession and started regaling me about his new startup focused on giving consumers control over their medical record. He asked me what I thought of it. I agreed to tell him if he agreed not to push me out of his car while it was still moving; I knew I was likely to burst his bubble about this idea. What I told him was this: while the aim is great, the odds of getting consumers to keep a website about their own health data up to date, get anyone to pay for this, and/or get any EMR to collaborate with this by connecting their data to it was a tough set of challenges (that’s me being super nice and candy-coating it). Many have tried and failed.

Because here’s the problem and what exactly explains, in my view, why the investment in consumer-focused digital health is down and the investment in clinically-focused products that reduce cost and improve clinical delivery is up: Consumers don’t want to be in the healthcare business and companies in the healthcare business have to figure out how to do it better or go out of business.

Consumers/people/humans, aka those of us walking around with organs, really don’t want to spend our time thinking about our health if we can avoid it. We like to just sort of live and work and eat and play and do the stuff we do without being though of as “patients” or even healthcare “consumers”. When we are approached as a bag of organs or a tumor in mobile form or an overeater of carbs or whatever dehumanizing moniker the healthcare system has an abundance of, we often rebel. And even when we don’t, we don’t like to pay for healthcare things that we think our insurance should be paying for. Which is pretty much everything, or at least that’s what people tend to think.

Yes, people will shell out a few hundred bucks for an activity tracker because they see it as a consumer electronics product, by and large, not as a healthcare product. But ask them to pay a $10 copay and they go all Kanye West on you. Even when it’s for a life-saving or at least life-improving service.

I am not trying to downplay the argument that healthcare has gotten ridiculously expensive for consumers, that we are shelling out a lot of cash for deductibles and copays related to essential services, and we are peeved about it – that is entirely true. But that’s not the whole story. We expect to pay for groceries and consumer products. We have had a lot of years where we didn’t pay much for our health (our employers did that) and now that we have to do more of it, we don’t want to. Add something “voluntary” or that we think should be embedded in what we already pay for insurance (like access to our data) and you are really asking a lot of people.

Let’s leave aside, for the moment, the logic and appropriateness of that state of mind. From a “what’s in your wallet?” standpoint, it’s just true. Sorry Uber driver. Healthcare entrepreneurship is not for the faint of heart.

And because the arm bone is connected to the wallet bone, consumer-focused digital health investing is down. There was a ton of money poured by investors into the space and, leaving aside the consumer products part of the market, there was a trickle of money poured by consumers into the revenues. It took the marketplace about five years to realize that this dog wasn’t really going to hunt. You can hope for consumer-pay revenue but five years in there is a growing recognition that hope is not a strategy. Exit investors, stage left.

So other than math gymnastics, why is investment in this segment up for strategic investors if down for financial investors? Well, it depends on which investors, but a lot of them are in it for the consumer affinity, aka marketing and branding, and not because they think there is a unicorn in them there hills. There has, thank goodness, been a growing recognition of the importance of the actual end-user customer in healthcare – go figure. With a rising need and desire to put the patient/person at the center of the equation, payers and providers and others who cater to them (tech companies, pharma companies, etc.) have recognized the importance of giving friendly experiences and easy-to-use products to consumers, recognizing full well that the entity that pays for these things is not going to be the patient.

It’s like Starbucks putting in comfy chairs – they don’t make you pay to sit in them, they make you pay for the core product, wifi, er, coffee. But they make the experience pleasant so you want to come back. The healthcare system companies are finally beginning, slowly, to learn this lesson and is willing to invest in consumer-focused digital health products to enhance their brand experience, which gives them a much more valuable financial return on investment (ROI), in the end, than does putting a few million bucks into a company’s equity. They call it “strategic investing” for a reason –it amplifies the company’s strategy to grow even if indirectly. Most, though not all, strategic investors will tell you that they are perfectly comfortable trading financial ROI from equity investments for better strategic ROI and are better off for it. So these entities can afford to “make it up in volume” as it were, and keep investing in this sector while the pure financial ROI investors run for the enterprise deals.

That we are finally entering an era where companies are building more and more products focused on improving clinical delivery, clinical outcome and cost-effectiveness is a blessed relief. So much capital has been wasted on things that really don’t move the needle in healthcare. But when entrepreneurs figure out how to use access and quality improvement methods to reduce costs and improve patient experience, bells ring, angels sing and money falls from the sky to the payer/provider bottom line. And let’s face it, it’s these guys that control the way money is spent, whether it be on health IT or pharma products or medtech products, digital or otherwise.

So Huzzah! Venture investors are finally recognizing this, or doubling down on it if they have known it for a while. And finally, entrepreneurs are learning that it can be advantageous to have an FDA approval, not a curse to have to avoid. The move to proof of value and evidence of efficacy is a beautiful thing. We can’t keep simultaneously whining about healthcare costs and investing in things that do not reduce them. Time to align incentives, people, and the proof is in the rising investment dollars in the clinical and chronic disease segments. Good investors…we get a biscuit. Entrepreneurs, heed this trend.

Yes, certain segments rise and fall and a lot of things around transparency, insurance selection and medical education have been rapidly commodified, thus driving the decline in investment in those areas. For straight-up insurance products, the cost of building the business is so steep it’s hard to imagine a good ROI ever happening for companies trying to build in the current era. Sounds good, very hard to execute. More power to them.

In the meantime, the prize is in the old business-to-business-to-consumer (B2B2C) arena, or just business-to-business (B2B). Business-to-consumer (B2C in the digital health world seems to have peaked and, unless something dramatic changes, that could well be a permanent state of affairs. The time is right to help health systems and payers and those that serve them in the pharma and medtech and health IT world learn to live in a value-based economy where less is more and less that’s better is way more.

And a prize from me to whomever comes up with a better moniker than “digital health.” Your suggestions welcome in the comments section below!

Lisa
Absolutely right on. Consumers are hounded at every turn and want to keep anything health related to themselves since their copays and deductibles have grown astronomically. If a digital healthcare company can show a true ROI, then there will be definite interest from multiple sources in my view.

Hi Lisa! I love this post and I’m excited to hear about this shift. I’m an alum of the RWJF Nurse faculty scholars program and our Culture of Health campaign is focused on creating healthy opportunities for everyone, particularly for those with chronic diseases. So many people struggle with how to maintain wellness in the context of disease and although we have alot to learn, there is great opportunity. Im anxious to see what comes out of this space and hopeful for the future! Thanks for the updates!
Taura

Good article, Lisa! I’m actually surprised that it has taken as long as it has to transition from products that don’t actually address disease conditions to products that do. I expect this trend to continue for quite some time.

On naming — in the not too distant future we won’t need to append “health care” with the word “technology” or “digital”. All care will depend on a technology support infrastructure (including old fashioned phones).
I think the concept is more like “Care where you are” which implies tools that go with you, whether they are tracking devices, mobile apps or wearables.
Finally, the market is still in a learning mode, especially around monitoring and tracking. We need more data on outcomes, usage, relevancy and security.
I like this post (yours that is).

About Lisa

Lisa Suennen is a venture capital investor and the managing partner of Venture Valkyrie, LLC, which publishes the Venture Valkyrie blog and co-produces the Tech Tonics podcast. She is also co-founder of CSweetener, a women's healthcare mentoring organization.